Bill Austin: The runaway billionaire

Bill Austin built a fortune from medical devices, then set out on a crusade to help the poor hear. But while he was off hanging with movie stars and rock gods, his company descended into a cesspool of fraud, embezzlement and betrayal. A cautionary tale of a second act to do good--gone woefully bad

Illustration by Sean Mccabe for ForbesStarkey CEO Bill Austin (centre) promoted Jerry Ruzicka (left) to become his company’s president in 1998. Ruzicka was fired in 2015 and replaced by Austin’s stepson Brandon Sawalich (right) in 2017

Red carpets are rare in St Paul, Minnesota. But last summer, Ben Affleck, Caitlyn Jenner, the first lady of Zambia and 1,500 other do-gooders filed into the Saint Paul RiverCentre to raise money for people in countries like Malaysia, Ghana and El Salvador to get hearing aids. Aerosmith’s Steven Tyler performed ‘Dream On’, but the gala’s ringleader, no doubt, was the billionaire Bill Austin. From under a cloud of white hair, Austin stood onstage, grinning, and thanked his fourth wife, Tani: “You have lifted me higher. You have allowed me to be part of a greater gift, to touch more lives than I ever could alone.”

Over the past 50 years, Austin has built an estimated $1.6 billion fortune with Starkey Hearing Technologies, expanding a small shop into the largest hearing-aid manufacturer in the US, with estimated revenues of some $850 million. He succeeded by working to create—and sell—innovative products like his customised in-the-ear hearing aids. Some of the planet’s most visible people—including five US presidents, two popes and Mother Teresa—were Starkey customers.

But Austin’s new ambitions are even loftier: To help the world’s poor hear. Over the past dozen years, he has traveled roughly 25 days a month with his nonprofit, the Starkey Hearing Foundation, handing out hearing aids to the penniless, a quest he says is directed by God. It’s a worthy goal: Around 466 million people worldwide suffer from disabling hearing loss. It’s also a way for the 76-year-old Starkey CEO to transform himself from a pedestrian midwestern medical-device maker into a cosmopolitan, world-improving type of billionaire.

But Austin’s saintly encore has had some less than heavenly con­se­quences back in Minnesota. For years, the only consistent sign of his presence at the company’s headquarters was the life-size statue of himself near an entrance; meanwhile he was rubbing elbows with celebrities like Johnny Depp and Katy Perry. Off chasing his humanitarian dreams, Austin turned Starkey’s day-to-day operations over to a company lifer, who was convicted in March of fraud, and later to a stepson, who’s been called unqualified and accused of sexual misconduct. Starkey’s growth has slowed. It hasn’t released a blockbuster product since 2014, and it’s losing market share with the Department of Veterans Affairs, which accounts for one fifth of the US hearing-aid market. These struggles add up to “a long and deep criticism of Austin as a leader,” says Paul Vaaler, a University of Minnesota law professor. “This is a story of fraud and embezzlement, but it’s also a story about corporate governance gone wrong.” It’s a textbook example of what can happen when a founder tries to move on to a second act before fully closing the book on the first.

In a Minnesota courtroom last winter during the trial of Starkey’s former president, Austin—who said on the stand that he once met an angel—was unrepentant about what’s taken him away from his business. “I made a deal with God,” he said. “And I have to keep my word.”

****Born in 1942 in Nixa, Missouri, a 370-person speck on the map in the Ozarks, Austin dreamed of becoming the next Albert Schweitzer, the pastor turned missionary doctor who won a Nobel Peace Prize. In 1961 he went to the University of Minnesota, inspired by the area’s medical breakthroughs, including the first successful open-heart surgery—which was performed at the university in 1952—and a promise from an uncle to let him work at his hearing-aid shop.

That job changed the course of his life. One day, as Austin tells it, an old man stepped into his uncle’s shop. His hearing aid’s feedback was so loud that it worsened his hearing, and no one had been able to repair it. Austin fashioned a new earpiece and helped him to hear again. Austin couldn’t stop thinking about how the man’s face lit up when his hearing aid was fixed.

After just a month in college, he dropped out and put all his energy into hearing aids. “As a doctor, I could help maybe 20, 25 people a day,” Austin said. “I felt that if I did the hearing-aid business that I would be able to impact more people.” (Forbes did not speak with Austin for this article. All quotes from him are from court documents or public appearances.) He started a hearing-aid shop, and by 1970 Austin was able to buy, for $13,000—about $86,000 today—a tiny ear-mold lab, which made the plastic parts of hearing aids. It was called Starkey Labs. The business thrived thanks to Austin’s innovations, such as a 90-day free-trial period and a custom-fit in-the-ear hearing aid—the product style for which Starkey is still best known. An early PR coup also helped: The White House revealed to the public in 1983 that President Ronald Reagan wore Starkey hearing aids.

By 1992 Starkey’s sales had reached nearly $200 million. But an ugly split that year from his third wife, Cynthia Dawson, spawned an even uglier lawsuit. Dawson alleged that Austin had promised to share future Starkey profits with her but had reneged after he met his current wife, Tani. The jury ruled in Dawson’s favour in 1998, awarding her $62 million. At least one lender showed Starkey the door. Austin needed a quick bailout, so he called on his billionaire friend, the late Minnesota Twins owner Carl Pohlad, for a loan.

The cash crunch put stress on a company already under pressure. Its rivals Widex and Oticon had beaten the rest of the industry by introducing digital hearing aids. That same year, Austin tapped Jerry ­Ruzicka to become its new president. Ruzicka had started at the company 21 years earlier as a repair technician making $4.50 an hour and had risen to become vice president of manufacturing. Around this time, Starkey finally released a digital hearing-aid product line. “The game changed, and they were behind. To Jerry’s credit, he pulled them up by the bootstraps and made them a technology company at least on pace with the others,” says Karl Strom, the longtime editor of the Hearing Review, a trade publication based in Duluth, Minnesota. With Ru­zicka running the place, Austin was free to emulate his hero, Albert Schweitzer, and travel the world doing good. “He [Bill] literally handed over the reins of the company to Jerry, and Jerry ran the company,” Strom says. “Bill would brag about not being involved in the day-to-day operations.”

By 2006 Austin was traveling nearly all the time for his foundation work, though he remained CEO. Austin’s confidence in Ruzicka grew to the point where he made him a trustee for three of his personal trusts. Ruzicka’s status was further cemented with a lucrative 10-year employment contract set to expire in January 2016. Along with his annual compensation of more than half a million dollars, plus a performance bonus, Austin promised to pay Ruzicka 10 percent of Starkey’s fair-market value in the event of Austin’s death or disability, or if Starkey was merged or sold.

Austin didn’t totally check out. While on the road, he spoke regularly with Ruzicka and Scott Nelson, the CFO, focusing on several key documents: Payroll reports, credit with banks, and production reports. But he wasn’t totally tuned in, either. Financial statements? Budgets? Audits? Austin said during the trial that he never reviewed them. “If I did—if anybody ever handed me one—I wouldn’t read it because I wouldn’t know how to read it,” he said of the audit reports. (Ruzicka’s defense lawyer disputes this, claiming Austin knew all along what was going on at Starkey.)

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During the summer of 2015, Austin began catching wind that things weren’t as they should be back in Minnesota: Ruzicka, he heard, was making plans to start a new company in the industry when his contract expired in January. So Austin asked Rob Duchscher, Starkey’s CIO, for access to the email accounts of Ruzicka and several other executives. Austin testified that the search led him to discover employment contracts for certain Starkey employees that said Starkey would pay them even if they went to work for Ruzicka. “It looked like I was paying for the new company at the same time Starkey was being sabotaged,” Austin said.

Austin confronted Ruzicka in a conference room—the meeting was captured by a hidden camera and a video of it was later played in court. Austin told Ruzicka what he had heard, and Ruzicka immediately denied it. “I’m not doing anything on your time or your money or your place, I’ll tell you that right now,” he said. But beyond that, Ruzicka added that he had “got the message” that Austin wanted him out when his contract ended. “I was looking for you to tell me you wanted me to stay,” Ru­zicka told Austin. “You didn’t do that.”

“I promised Brandon he’d be president,” Austin said, referring to his then-40-year-old stepson from his fourth marriage. “I don’t like to go back on my word.”

Ruzicka told Austin, “Brandon isn’t capable of running this company. Ever. Ever. And if you think he is you’re foolish, and you’ve never been foolish.”

Austin fired Ruzicka that day.

Meanwhile, Duchscher and another colleague were tasked with searching Ruzicka’s and Scott Nelson’s computers. It was then that they found a W-2 tax form for Nelson showing he made over $4 million in one year, well above what Starkey executives typically earned.

Austin purged the top rungs of his company, including Nelson, senior vice president of operations Keith Guggenberger and senior vice president of human resources Larry Miller. (Ruzicka, Miller and Guggenberger filed lawsuits against Starkey in response.)Austin called in the FBI.

In November 2015, the feds raided Nelson’s and Ruzicka’s homes. Agents were spotted carrying a computer and boxes of documents out of Ruzicka’s front door. Then in September 2016, the Department of Justice indicted Ruzicka, Nelson, Mil­ler and two others: Jeffrey Taylor, the ex-president of a Starkey supplier, and Lawrence Hagen, a former Starkey employee who once sold a company to Austin. Prosecutors accused them of conspiring to steal more than $20 million from Starkey and Austin by fraudulently awarding themselves stock in a Starkey affiliate and later paying themselves $15 million for the same shares and collecting millions in fake loans, bonuses and hidden purchases. Ruzicka was also accused of stealing the 2011 Jaguar that had been his company car, and Nelson was accused of buying a condo with Starkey funds to carry on a “clandestine personal relationship” with an employee. (Jeffrey Longtain, the COO and president of a Starkey subsidiary, was charged with filing a false tax return in March 2017; he pleaded guilty.)

With Ruzicka gone, Austin handed the reins to his stepson Brandon Sawalich, who became president in July 2017. Sawalich had started at Starkey at age 19. By 2010 he had become a senior vice president.

But despite his ascension, criticisms of Sawalich abounded. In an interview with FBI agents, former CTO Tim Trine said Sawalich had a “short attention span” and didn’t have the “technology expertise” to run the company. After pleading guilty in December to conspiracy to commit fraud, Nelson testified that Sawalich got the company to pay for a variety of personal ex­penses up until about 2011—submitting bills for an ice skating rink, a chicken coop, lawn services, dog boarding and even a fish-tank cleaning. Nelson added that Sawalich hosted his 40th birthday party at George Washington’s house in Virginia, and Starkey footed the bill.

Sawalich has also been accused of harassment. “I would have to warn [sales] reps when they came, ‘You might have [Sawalich] hitting on you. So when you see him coming, go the other direction. Just get out of the room,’” recalls Michael Schmit, a former regional sales director. One former employee told Forbes that when she was new, Sawalich requested multiple times to meet her over drinks after 10 pm. One former Starkey employee filed a lawsuit accusing Sawalich of sexually assaulting her in a hotel room following a Starkey party at Austin’s house in 2001; she was 21 at the time and was fired from her job five days after the encounter. Sawalich denied the allegations, and the lawsuit was settled in 2003. Nelson testified in the 2018 trial that Sawalich had a reputation as a “serial harasser” of female employees, had tried to get ­raises for some of the women who had slept with him and had gotten one ­employee pregnant.

Through a spokesperson, Starkey denies these allegations, claiming they were “false and lack corroboration” and were made to distract the jury. Sawalich, who didn’t testify at the trial, didn’t comment for the story.

The trial of Ruzicka and the other three began this January. In all, more than 30 witnesses were called over six weeks. Just before the trial ended, Austin was found by the court to have provided false testimony when he was discussing Ruzicka’s employment contract. The judge wrote that Austin’s false statements “may suggest to the jury that Austin knew more about Ruzicka’s employment contract—and perhaps Ruzicka’s other dealings—than his testimony suggested.” Austin wasn’t charged with perjury, but statements from his testimony had to be struck from the rec­ord. Still, in March the jury found Ruzicka guilty on eight out of 25 ­charges and Taylor guilty on three charges. Both of them could face up to 20 years in prison. Miller and Hagen were acquitted.

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Meanwhile, Starkey has shown signs of slipping. At the VA, the company’s market share fell from 24 percent in 2014 to 16 percent in 2017, per an analyst at Bernstein Research. According to UBS surveys of over 2,600 audiologists taken between October 2016 and December 2017, Starkey’s hearing aids were the most frequently returned by customers.

More litigation could be coming. While Austin personally owns an estimated 93 percent of Starkey, the remaining 7 percent is owned by employees through an ESOP. They might sue Austin and Ruzicka, the two trustees of the ESOP, claiming they damaged the value of the shares. No lawsuits appear to have been filed yet. Meanwhile, Ruzicka is not backing down. His attorney filed in April for a new trial, citing Austin’s “perjury” and prosecutorial misconduct.

Starkey has hired new execs, including a COO from GE Healthcare and a CTO from Intel. They plan to release a new hearing-aid product line this summer that will use embedded sensors to track physical activities, much like a Fitbit. But as long as Sawalich is still leading the company and Austin is traveling the world, there’s nothing to keep history from repeating itself.

(This story appears in the 20 July, 2018 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)